Increased Visibility for Higher Oil Prices

Includes: BNO, OIL
by: Wall Street Strategies

by Conley Turner

Crude oil prices continue to rise and are at some of the highest levels recorded in just over two years. There are a number of factors accounting for this move, which include the ongoing unrest in the Middle East and North Africa and a weakening dollar. U.S. Benchmark crude for June delivery settled on the last trading day of April at $113.93 on the New York Mercantile Exchange. Brent crude for June delivery closed the month at $125.89 a barrel on the ICE Futures exchange in London.

The escalating violence in the Middle East and North Africa threatens to prolong supply disruptions. The situation in Libya continues to garner headlines as the rebels struggle in their efforts to oust strongman Muammar Gaddafi. Clearly forces loyal to the dictator have outmaneuvered the revolutionaries despite the air support that they have been receiving from NATO. At this juncture, that conflict has entered a stalemate and would not likely move ahead without the introduction of non-indigenous forces to aid the rebel plight.

In the most recent development in Syria, the nation's security forces continue to fire upon the civilian protestors causing that situation to further deteriorate. The country's majority Sunni population is the forefront of the challenge against the minority Alawite regime. The Alawites are considered be a derivative of Shiite Islam, which is under the influence of Iran. As the most populous Shiite country in the region, Iran has an interest in maintaining the stability of the Syrian leadership as it attempts to exert its influence. The prevailing sense at this juncture is that Saudi Arabia has a hand in supplying support to the protesters in an effort to thwart Iran's ambitions. Should the situation deteriorate further, it could have a destabilizing effect on the region.

Another factor pushing oil prices higher has to do with the value of the U.S. dollar, which continues to slip against most major currencies. To date, the greenback has declined to some of the lowest levels seen in about 30 months. The greenback is being undermined by the limited prospects for the US to increase interest rates for the foreseeable future. In its most recent decision, the U.S. Federal Reserve's opted to keep rates low for what it describes as an extended period. The Fed Chairman, Ben Bernanke conveyed to market participants that it was unknown when the Fed would engage in any tightening activity. The price of oil and other commodities are inversely related to the value of the dollar.

The rise in oil prices comes at a time when the International Monetary Fund (IMF) has indicated that its current projections for global economic growth will require an extra 15 million barrels per day (mdb) or so in extra capacity in the next five years. According to the Energy Information Agency (EIA) the world oil consumption in 2010 stood at about 86.7 million bpd.

Since the middle of the last decade, only about 4mbd in extra capacity have been realized and crude oil prices escalated accordingly. Saudi Arabia, the largest producer in OPEC, has already stated that it is not going to increase production anytime soon, which will likely add support to crude oil prices. In recognition of the severity of the situation, the Obama administration has publically urged the world's oil producers to increase output. This comes at a time when gas prices domestically are soaring and have surpassed $4 a gallon in many jurisdictions. At this juncture, the average price of regular unleaded gas in the U.S. is over $3.90 per gallon according to the American Automobile Association (AAA). The price of gas has increased for 38 consecutive days for a total of 10% during that period.

These are but some of the reasons for crude oil prices rising. This is likely to remain the case as risk premiums become increasingly elevated. While invariably there will be pull backs in the price that may at times be dramatic, oil appears to be on a secular upward trend.